A Century of Vertical Fiscal Imbalance in Australian Federalism

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Abstract: After a century of Australian fiscal federalism, while the problems posed by horizontal fiscal imbalance have largely been resolved, the thorny issue of vertical fiscal imbalance remains. After reviewing the evolution of economic doctrine on fiscal federalism, this paper examines the historical evolution of vertical fiscal imbalance in the light of the views expressed by Australian economists over the past century. It is argued that the perceptions of Australian economists largely reflect wider currents in mainstream economics, with an early 'pragmatic' view, an orthodoxy based around the dominant economic theory of fiscal federalism and a 'dissenting' school associated with Groenewegen.

1 Introduction

Although Australians are accustomed to thinking of themselves as citizens of a new nation--a theme even emphasised in the national anthem--in fact the Commonwealth of Australia is amongst the oldest continuing federal systems in the world, after the United States (1789), Switzerland (1848) and Canada (1867) (Watts 1999). Given the comparative longevity of the Australian federation, its remarkable stability, and the pivotal position federalism plays in the political life of Australia, it seems reasonable to expect that that this would have engendered considerable scholarly interest amongst economists in investigating the economic properties of Australian federalism. Somewhat surprisingly, this has not been the case. Indeed, several commentators have bemoaned the neglect of Australian federalism by Australian economists. For example, in a review of the literature on Australian federalism, Galligan and Walsh (1990, p. 3) have referred scathingly to 'the relatively few Australian economists who care about federalism'. Similarly, Peter Groenewegen (1979, p. 51) has drawn attention to the 'lack of interest in the federal system in the 1950s and 1960s' as a 'fact of academic life' with 'little or no research carried out in the universities in this period'. Moreover, in the preface to their edited volume entitled The Development of Australian Fiscal Federalism, Wilfred Prest and Russell Mathews (1980, p. xi) pointedly pay tribute to the 'small band of academic economists' who contributed to the evolution of Australian federalism, especially L.F. Giblin and R.C. Mills.

This is not to suggest that Australian economists have not made significant contributions to both the development of federal institutions in Australia and our understanding of the operation of Australian federalism. Russell Mathews, the founding Director of the now defunct Centre for Research on Federal Financial Relations in 1972 and first Chairman of the Australian Council for Intergovernmental Relations in 1976, is without doubt Australia's pre-eminent scholar of fiscal federalism. Together with Robert Jay, in 1972 he co-authored Federal Finance: Inter-governmental Relations in Australia Since Federation, the first major study of Australian fiscal federalism, covering the period from federation until the end of the McMahon government. A companion volume entitled The Public Sector in Jeopardy (1997), written with Bhajan Grewal, deals with the period beginning with the Whitlam administration until the end of the Keating era. Together these two texts thus provide a continuous analysis of Australian fiscal federalism from 1901 to 1996 and constitute an invaluable resource for economists interested in inter-governmental financial inter-relationships in Australia. Mathews also made numerous other contributions to Australian fiscal federalism (see Grewal 2000) and was honoured inter alia by a Festschrift entitled Taxation and Fiscal Federalism: Essays in Honour of Russell Mathews (Brennan, Grewal and Groenewegen 1988) containing papers by leading international public finance scholars.

In the modern era, several other Australian economists have made significant contributions to our understanding of fiscal federalism. Quite apart from his co-authorship of The Public Sector in Jeopardy, Grewal has written extensively on the topic. …